After recession closures, company is back in U.S. expansion mode

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As Starbucks once again expands in the U.S., it's introducing a new, eco-friendly design, among other changes. This photo is from a recent remodel of a Starbucks in the Seattle neighborhood of Capitol Hill.

Starbucks already has two stores in the busy Harvard Square area of Cambridge, Mass., and you might think that would be enough to satisfy the caffeine needs of the area’s students and academics.

But recently, the coffee retailer opened a large third location. Arthur Rubinfeld, Starbucks’ president of global development, said business in the new location has been brisk.

After being forced to shutter hundreds of locations in a recession that humbled the company, Starbucks is back in growth mode.

The maker of Frappuccinos and cappuccinos expects to have about 100 additional stores at the end of its current fiscal year, which ends in October. It plans to add 200 more outlets in the next fiscal year. The company currently has nearly 11,000 domestic locations.

The company’s international growth plans are even more ambitious, with plans to add 500 international locations this year and 600 next. The current total is about 6,000 locations.

Many analysts have expected the company to expand internationally in places like India and China, but Starbucks’ recently unveiled U.S. growth plans caught some off guard.

“It’s a little bit of a surprise, and there is a concern with how many stores they’re planning,” said R.J. Hottovy, senior restaurant analyst with Morningstar.

Rubinfeld insists that Starbucks — which at one point was opening an average of six stores per day worldwide — has learned from its past mistakes.

“Growth for growth’s sake is not a strategy,” Rubinfeld said.

Back in the go-go days before the recession hit, Starbucks often was one of the first retailers to locate in a new residential area, grabbing prime real estate and expecting customers to show up as people moved into the area, Rubinfeld said

Then the recession and housing bust hit, and the customers the company expected to show up in these new locations never materialized.

"I think part of the learning is that you cannot depend on external sources to grow into a store's profitability,” Rubinfeld said.

Rubinfeld said the recession allowed Starbucks to do what other companies do all the time: Slow down and take a close look at which stores were performing and which were falling flat. Starbucks founder and chairman Howard Schultz returned to run the company as chief executive, acknowledging that Starbucks had lost its way amid the hubbub of explosive growth, watering down its brand with offbeat offerings like movie promotions.

Schultz made the decision to closed hundreds of stores and lay off thousands of workers.

Since then the company has remodeled some locations and has placed a new focus on eco-friendly building standards. Menus have been tweaked to include healthier fare like oatmeal and smaller versions of indulgent treats. The company also rolled out new products, including its successful new instant coffee Via.

With the business back on track, Rubinfeld said the company sees opportunities to selectively add stores. Despite the weak economy, Starbucks' earnings were up by more than 30 percent in the most recent quarter, beating Wall Street expectations.

The company is targeting dense urban areas, smaller cities and even locations inside other retailers. The company has said that many of its planned new locations will be licensed, which typically means the store is inside a retailer like a Safeway or Target or in a location such as an airport.

Hottovy, the Morningstar analyst, said the company may have saturated many big urban areas, where it is not unknown to have two Starbucks on the same block. But Hottovy sees room for the company to grow in smaller cities, suburbs and along highways where travelers might be looking for a good cup of joe.

Hottovy sees more promising growth potential in places like China and India where there’s lots of room to expand. In the United States, he thinks Starbucks has more potential to sell its packaged coffee at other stores.

“What we’ve seen the last couple years is there is a place for Starbucks on the grocery aisle and mass merchant shelves,” he said.

Still, Rubinfeld said the company has and always will have a strong focus on its retail locations.

“We've always been driven by store growth, as we built the company out, and we are a retailer at our core,” Rubinfeld said.